Canadian dollar seen strengthening in 2013 as risks dissipate, rates rise: Reuters poll

Solarina Ho

5 Min Read

TORONTO (Reuters) - The Canadian dollar will strengthen against its U.S. counterpart over the next year, economists polled by Reuters say, with a recovering global economy and a possible Bank of Canada interest rate increase providing support.

A man holds the new Canadian 100 dollar bill made of polymer in Toronto November 14, 2011. REUTERS/Mark Blinch

The median forecast in the poll of 53 economists and foreign exchange strategists, released on Wednesday, sees the commodity-linked Canadian dollar trading at C$0.99 to the U.S. dollar, or $1.0101, in one and three months’ time.

Over six months, the survey saw the currency strengthening to C$0.98, or $1.0204, and holding at that level a year from now. The Canadian dollar traded at C$0.9919 to the U.S. dollar, or $1.0082, on Wednesday.

“We still expect the global outlook to continue to expand. So some of the downside risks we’re currently worried about are going to be hopefully less worrisome as we move forward,” said Craig Wright, chief economist at Royal Bank of Canada.

“In that environment, commodity prices should regain a bit more of the ground that they’ve lost recently and that tends to be positive for the Canadian dollar.”

RBC, among the more bullish forecasters, sees Canada’s dollar trading around C$0.99 in a month and strengthening to as high as C$0.95 versus the U.S. dollar, or $1.0526, in 12 months.

The median forecasts are similar to those in a poll published a month ago in which the currency was seen trading at C$0.99 in a month, and at C$0.98 in three, six and 12 months.

The currency has weakened about 2.5 percent since the start of the year, but has gained about 3 percent since the 2012 low in September.

One encouraging development for the Canadian dollar in recent months was a discussion by the International Monetary Fund on having big currency holders such as central banks disclose more details on their holdings of Canadian and Australian dollars.

Analysts said this reflects the fact that many global players have been increasing their holdings of Canadian dollar assets, partly because it is one of the few developed countries to retain an undisputed triple-A credit rating.

“The Canadian dollar safe-haven play still has some positive influence here. So our relative outperformance is part of the story and that’s going to continue to provide some support,” Wright said.

BANK OF CANADA TIGHTENING BIAS SUPPORTS

The prospect of tighter monetary policy was also seen supporting the Canadian dollar. The Bank of Canada on Tuesday was unwavering in its view that it may need to hike interest rates eventually, even though it kept its overnight lending rate at 1 percent for now.

The central bank repeated the wording for its rate outlook that it used in October to signal it is leaning towards tightening monetary policy. It is the only central bank in the Group of Seven wealthy nations to have that bias.

By contrast, the U.S. Federal Reserve has said it expects to keep its main policy rate near zero until at least mid-2015.

A separate Reuters poll released last week showed global forecasters believe the Bank of Canada will raise interest rates in the fourth quarter of 2013. <CA/POLL>

Still, a string of somewhat disappointing North American data in recent months has tempered some of the bullish sentiment and prompted the Bank of Canada to tone down its tightening rhetoric in October.

Adding to the disappointment over economic growth are unresolved fiscal issues in the United States and ongoing debt concerns in Europe.

“We pretty much haven’t changed out view too much in recent months ... All those key event risks still exists,” said Greg Moore, FX strategist at TD Securities, which sees the Canadian dollar weaker than the greenback for much of the first six months of 2013.

Moore said the outlook was expected to brighten after the first quarter of next year, though factors such as a weakening Canadian housing market and the persistent current account deficit could weigh.

“If those (trade and current accounts) do remain persistently negative, that will certainly play into the value of the Canadian dollar,” Moore said.

Last week, data showed a drop in exports helped push Canada’s current account deficit close to a record high in the third quarter, a development that some analysts said sends a signal that the Canadian dollar is too strong.

“Our economists believe that a correction in housing activity could drive the Bank of Canada to turn dovish,” Credit Suisse analysts Peter von Maydell and Anezka Christovova said in an email. Credit Suisse sees the Canadian dollar trading around C$0.99 for the next 12 months.